Market index returns

Week to date since June 05, 2024 as of June 12, 2024

Index definitions: Global Real Estate = FTSE EPRA/NAREIT Developed Index; Global Infrastructure = Dow Jones Brookfield Global Infrastructure Index; Natural Resource Equities = S&P Global Natural Resources Index; Commodity Futures = Bloomberg Commodity Index; TIPS = Barclays US TIPS Index; Global Equities = MSCI World Index; Real Assets Index = 30% FTSE EPRA/NAREIT Developed Index, 30% Dow Jones Brookfield Global Infrastructure Index; 15% S&P Global Natural Resources Index; 15% Bloomberg Commodity Index, 10% Barclays TIPS Index. Source: Bloomberg, DWS. Past performance is not indicative of future results. It is not possible to invest directly in an index.

Global equities continued to rise this week, with the MSCI World Index hitting a fresh all-time high in the process. After showing brief concern over May’s hotter-than-expected U.S. nonfarm payroll data, investors were treated to multiple signs of inflation cooling in the U.S. and even brushed aside comments and updated economic projections from the U.S. Federal Reserve (Fed) that would have been viewed as hawkish in isolation. The E.U. also held parliamentary elections this week, which had some surprising results and caused some distress in regional stock markets, but nonetheless, global equities managed to grind higher during our review period. Equity market volatility remains subdued, but bonds were whipsawed around with the U.S. 10-year Treasury yield spiking on the payroll data release only to drop precipitously on Wednesday’s Consumer Price Index (CPI) data. Against this backdrop, Real Assets saw a slight performance decline this week and underperformed broader equities. Commodities were the exception, where broad-based gains in the energy segment sent the asset class higher, outperforming global equities. The balance of the Real Asset classes finished in the red and underperformed broader equities.

Why it matters: The disconnect between what the U.S. Federal Reserve (“Fed”) is saying and what investors expect is growing once again, which could lead to disappointment down the road if easing doesn’t start this year. Recent election results in the E.U. and India demonstrate that surprise results can happen (except maybe in Russia) and could affect both capital markets and geopolitical alliances. This is especially important given upcoming elections in France and the U.K., which will be followed by a presidential election in the U.S. this fall, where even the savviest political pundits are having trouble handicapping the odds of a winner. The conflict between Israel and Hamas seems far from over, despite the U.N. Security Council recently passing a ceasefire resolution and could lead to a renewed regional flareup involving Iran or its proxies. In Ukraine, the war continues and risks drawing other countries into the crosshairs as Ukraine contemplates using allied weapons to strike deep into Russian territory.

Macro Dive: First, we’ll cover the recent Fed meeting and what it might mean on the timing of rate cuts. Then, we’ll look at recent inflation reports in the U.S. and conclude with some implications from the recent EU elections.

• Fed strikes a hawkish tone: The Fed concluded their 2-day policy meeting on Wednesday, choosing to hold the Federal Funds Target Rate range unchanged at 5.25%-5.50%. Noted in the prepared statement was “modest further progress” toward their 2% inflation target, but that’s where the dovishness stopped. The updated dot plot showed members expect only one rate cut this year, down from three in their previous forecast, though they did add one additional cut to their 2025 forecast. In their updated economic projections, GDP growth was unchanged at 2.1%, 2.0%, and 2.0% for 2024, 2025, and 2026, respectively, while unemployment of 4.0%, 4.2%, and 4.1% for the same time periods was nudged up by 10 bps for 2025 and 2026. Their inflation forecast (for PCE) was increased by 20 bps to 2.6% for 2024, and up 10 bps to 2.3% for 2025, with core PCE raised by the same amount in each year to 2.8% in 2024 and 2.3% in 2025. Perhaps most concerning was a 20 bps increase to the expected Federal Funds rate to 2.8% for the “longer run,” which did drive longer-term Treasury yields up upon release, though yields had already fallen earlier in the day on the CPI release and did end the day lower overall. Chairman Powell in his presser stated, “We think policy is restrictive,” but then went on to state that only time will tell if it’s “sufficiently restrictive.” Overall, the meeting seemed to hold a hawkish bias, and some even wondered if the Fed decision and statement were prepared well ahead of the CPI release earlier in the day (which we discuss below). By the end of the day, investors (via Fed Funds Futures) had priced in a full rate cut by the November meeting and a 76% chance of a second cut by the end of this year, though this may have had more to do with CPI than the Fed.
• But wait, what about CPI?: CPI data for May was released hours ahead of the Fed statement and showed no growth in prices from April’s level overall. The 0.0% month-on-month print was the first since July 2022 and lower than estimates of 0.1%.  The headline year-on-year print of 3.3% was also 10 bps lower than estimates. Core CPI (which excludes volatile food and energy) at 0.2% for the month, and 3.4% for the year, was also below estimates and retreated from April’s levels. For the month, transportation costs and energy prices saw the steepest declines, with both falling double digits on an annualized basis. However, shelter costs and owner’s equivalent rent remained high at 4.9% and 5.3%, respectively. The following day, Producer Price Index (PPI) data was released, which also showed continuing improvement on the inflation front. PPI Final Demand fell by 0.2% month-on-month in May, while core PPI and PPI ex-food, energy, and trade showed no growth; all were 30 bps lower than estimates. Year-on-year prints showed similar trends, indicating that inflation is starting to ease. Just after our review period, this release led to Treasury yields retreating further, with the 10-year around 4.24% and investors upping the odds of a second rate cut by December to over 99%.
• Changing of the guard: Both the U.K. and France could be under new leadership in the coming month. The U.K. general election will be held on July 4th (which seems a bit ironic to us Americans) and will be their first general election since leaving the E.U. Per Bloomberg data aggregating 11 different polls, the Labour party appears on track to obtain over 44% of the seats, compared to around 22% for the Conservatives, which currently hold a majority of seats in the House of Commons. If this polling represents actual voting, it would be an embarrassing defeat for current Prime Minister Rishi Sunak, who called for early elections in May, and would likely see Keir Starmer installed as the new Prime Minister. Meanwhile, in France, President Emmanuel Macron called for snap elections following last week’s European Parliamentary elections, where the far-right National Rally (RN) won 31.5% of the votes, more than twice that of Macron’s centrist Renaissance party. Macron  is urging voters to coalesce to defeat the RN. A recent Elabe election poll has RN winning 31% of the vote compared to just 18% for Renaissance. The complex majoritarian voting system of two rounds (30 June and 7 July) makes it difficult to derive precise estimates for the distribution of seats from standard opinion polls. Whilst the far right looks to strengthen its position, France may end up with a hung parliament—in which neither the far right nor the left/ centrist forces can muster a majority.

Real Assets, Real Insights: We’ll start with a review of fundamentals within lodging. Next, we’ll look at the growing demand for electricity and how that demand has been satiated. Finally, we look at what’s been driving the price of natural gas higher recently.

• Time to check out? (U.S. Real Estate): The tone for lodging turned more negative last week, with estimates being lowered at both the NYU International Hospitality and NAREIT industry conferences. Tourism Economics and STR (owned by Costar Group) both cut their revenue per available room (“RevPAR”) and average daily rates (“ADR”) forecasts for the year. Industry leaders noted the negative impact of the higher cost of living on lower and middle-income households and consequently their ability to travel. This dynamic has weighed on lower-priced tier hotels, while higher-priced tiers are seeing sufficient demand but are facing lesser pricing power given changes in travel patterns. Segment performance continues to vary significantly, making for one of the most uneven recoveries in recent history;  this dispersion could provide opportunities for active managers to create alpha through stock selection. 
• Southernly Tailwinds (Global Real Estate): Australian REITs (AREITs) have outperformed the global EPRA Developed REIT Index by nearly ~8% year-to-date (in USD terms). The predominant driver of Australia’s performance can be attributed to the ~18% outperformance of recent index entrant Goodman Group (GMG). GMG entered the global index as a top-ten global REIT by equity cap and has been in high demand, given its consistent earnings growth track record and a large and expanding data center development pipeline (currently 4.3 GW). Strong outperformance by a country can often invite reversion but Australia REITs will likely benefit from earnings growth troughing in 2024 and inflecting higher year-over-year for at least the next two years (+~18% overall), supported by a weakening debt cost reversion, a re-emergence of growth from residential and manufactured housing development books, and an improving funds management outlook.
• Powering on (Infrastructure/Commodities): Per a recent BloombergNEF report, power demand in the U.S. grew by 15.8GW (or by 4%) in the first five months of 2024 compared to the same year ago period. Additional electricity generation from solar was 5.5GW (35% of new demand), while wind made up 2.3GW (14% of new demand). The use of coal has been on the decline, as has electricity generation from other sources, while nuclear’s impact has been minimal. So, what’s been plugging the gap? Natural gas has provided the heavy lifting for nearly60% of the incremental demand. The U.S. (and other parts of the world) are undergoing an energy transition to cleaner and more sustainable sources of generating electricity, but additions in the intermittent areas of solar and wind cannot keep up with growing demand. Natural gas, which burns much cleaner than coal (and is often cheaper too), has been the go-to fuel source. Furthermore, when compared to wind and solar, only natural gas use can be dialed up in the summer months, when electricity demand peaks due to cooling needs. Demand for electricity is expected to grow, especially with the use of electricity in data centers (for AI usage) making up a larger portion of demand, and natural gas is likely to be used as the bridge fuel source until additional wind and solar projects can come online. 
• A natural born rally (Commodities): Speaking of natural gas, prices have been on the rise in both the U.S. and Europe. The prompt futures contract for Henry Hub natural gas (a major U.S. pricing indicator) has risen by 58% from April’s low, while TTF gas (a European pricing indicator) bottomed in February of this year and has since risen by 53%. With U.S. producers curtailing production, inventory building has been slower heading into the higher-usage summer months. With the U.S. seeing the 2nd warmest year-to-date record (per the National Oceanic and Atmospheric Administration) and a warmer-than-average June, natural gas demand could increase this summer, sending prices higher. In Europe, the situation is better at present, with both Denmark and Sweden saying they are no longer signaling risk of natural gas shortages, calling off alerts raised after Russia's invasion of Ukraine. However, Russia’s Gazprom, which still supplies parts of Europe, has been reducing production, hitting an all-time annual low last year, which could be taken even lower this year. Additionally, Ukraine has already stated they will not renew Gazprom’s lease on the pipeline supplying Europe that traverses their country when it expires at the end of this year, which will force some European countries to find alternative methods of gas delivery.